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Rating Action on Protective Life - Analyst Blog

As a part of its periodic review exercise, the rating agency
A.M. Best Co. has undertaken rating action on the life insurer
Protective Life Corporation
(
PL
). Per its action it has reiterated the issuer credit ratings
(ICR) of "a-" and debt ratings of Protective Life.

Concurrently, the rating agency reiterated the financial
strength rating (FSR) of A+ and ICR of "aa-" of the main life as
well as health subsidiaries of the insurer.

All the ratings are of investment grade. A.M. Best Co. also
carries a stable outlook on the company which reflects remote
chances of any rating change in the near term.

Protective's ability to acquire and integrate companies as
well as chunks of business is also well appreciated by the rating
agency. Recent acquisitions made by the company have poised
it well with respect to a consistent source of earning, by
entering into new regions.

With reference to the balance sheet, the rating agency finds
that Protective has a strong balance sheet with adequate risk
adjusted capitalization at each of its operating entities. While
the company has a greater level of financial leverage in its
capital structure, the company's capacity to service its debt
obligations remains strong. The company also maintains adequate
financial flexibility witnessed by healthy cash flows from its
subsidiaries, financing aid from line of credit of upto $750
million.

The rating agency went a step further to find that the
company's balance sheet carries intangible assets in the nature
of deferred acquisition costs which is more than 100% of
shareholder's equity. Moreover the company's liberal use of
captives to finance Regulation XXX and Guideline AXXX (AG38)
reserves and to weather earnings volatility driven by its hedging
activity would require greater scrutiny of its risk based capital
ratio.

With respect to its business performance, the rating agency
notes that the company's sale in its life and annuity line of
business remained essentially unchanged in 2012. The rating
agency is of the opinion that a number of steps undertaken by the
company which include repricing of certain products,
discontinuance of some others and introduction of new products
will help it regain lost business.

Despite challenging market conditions the rating agency is
confident of the company's ability to remain profitable in its
core business. Led by an improvement in equity markets the
company has benefited from a rise in fee received on separate
account assets along with higher variable annuity sales.

The rating agency is, however, of the view that the continuing
low interest rate environment may suppress earnings.

Another cause of concern is the company's investment portfolio
with a significant exposure to residential mortgage-backed
securities that has declined in recent periods. While the
commercial mortgage loan portfolio has performed well, Protective
carries a relatively higher amount of exposure to real
estate-related assets, which can lead to investment loss if the
economy turns weak.

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